The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably arises. These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives market, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart, how they cater to both institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can significantly impact trading costs. Lucas Krenn, a derivatives trader, emphasized that perps are the primary tool for crypto-native firms, as dated futures lack liquidity. Kenneth Ong, an independent trader, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders stressed that margin efficiency is a significant advantage of perps, allowing for more effective risk management across different venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events outside traditional market hours. Despite the benefits, traders are wary of the funding rates, which can be unpredictable and costly. Krenn and Ong warned that the funding rate can become a burden if the market does not move as expected, and that it is essential to consider this cost when trading perps. The traders also addressed the criticism of perps following the October 10 crash, which triggered widespread deleveraging. Krenn argued that the issue was not with perps themselves but with the crypto exchange margin model. He emphasized that the key distinction is between facing a proper clearing house with a mutualized default fund and an exchange that socializes losses onto winners. Krenn also offered an insightful perspective on the asymmetry of perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. In contrast, negative funding rates can persist, making the short side more vulnerable to unbounded costs. The example of lending protocol Euler's token illustrated this point, where shorts were paying high fees to longs due to a concentrated float and constrained arbitrage. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency. Nevertheless, traders must be aware of the unique challenges, particularly the volatile funding-rate exposure, which can be difficult to quantify and hedge.